India’s urban housing challenge

The new Urban Development Minister has vowed to ensure housing for all urban residents by 2020. He has some challenge at hand.

The Government estimated a deficit of 18.78 million housing units in 2011, with 95 percent among the lower income group (LIG). To put this in perspective, the total number of housing units sanctioned in seven years under the flagship JNNURM is 1.44 million, of which less than 0.6 million have been completed and occupied.

Hitherto, dictated mainly by acute land scarcity, lower income housing colonies have been constructed mainly in city suburbs. This militates against one of the fundamental requirements of affordable housing – proximity to its residents’ livelihood centers. It is very obvious that the only way to accommodate this demand, apart from allowing for the inefficient sprawl, is by building vertically. The Floor Area Regulations (FAR) have to be changed to allow for vertical construction.

Now vertical growth presents several challenges. One, it necessitates large investments in development of sufficient infrastructure carrying capacity – road carriageway, public transit, water and sewerage networks etc. Two, vertical housing is more expensive than the prevailing G+3 model and also requires maintenance – lifts, water storage, motors etc. Three, in the absence of a substantial public subsidy, these units become simply out-of-reach for the target LIG population. Finally, the cumulative burden of infrastructure and housing cost, and maybe even part of the maintenance, goes beyond anything the federal and state governments can afford.

Public Private Partnerships (PPPs) have been suggested as a way out. The standard PPP model is a space sharing strategy whereby private developers, incentivised with certain concessions, construct LIG housing in some part of the land and cross-subsidise it by selling residential and commercial space in the remaining part. This arrangement is possible either in slums or in vacant government lands.

But each slum redevelopment project involves surmounting chronic political and social problems, complicated property disputes, and endless litigation. Therefore while this model has been in the works, not just in India but across the world, for many years, there have been only a handful of successful examples. To do this on a scale required to make a serious dent in the massive housing demand is to expect a miracle.

So what’s the way out? For a start, we could do well to put aside sweeping promises and be prepared for a tough and long-drawn slog. You just can’t build 20 million houses in six years or even 10 years through one program. It has to emerge from a mix of less restrictive zoning regulations, large-scale slum redevelopments, and targeted private and public housing projects.

Urban planning and its enforcement are central to all these efforts. Each city will have to prepare and implement an affordable housing focused master plan. The vertical redevelopment of blighted and old areas will have to be incentivised through increased FAR regulations and augmentation of infrastructure through public investments. This is likely to increase the supply of all types of housing, thereby putting downward pressure on prices.

All private group housing projects beyond a certain size should be mandated to develop a defined share of affordable housing, as is being done under the existing programs. In slums and brownfield projects, this will have to be encouraged through higher FAR and infrastructure grants. Apart from mandates and incentives, green-field developments should be encouraged only on transportation corridors. The current policy of higher FAR and infrastructure grants to develop 25 percent affordable housing units should be made more operationally flexible. All this will have to complement massive public housing programs on government lands through either direct construction or PPPs.

In the largest cities the only reasonably large stock of vacant lands are those occupied by defence, railways, and other central establishments. But, as many state and local governments have realised, getting these agencies to legally part with their lands for local development purposes is a herculean task. A strong commitment by the union government could surely help unlock some of these parcels, though it will take time and co-ordinated efforts. They should be nudged to either relocate to the suburbs or more realistically, accommodate their requirements within smaller land parcels. In any case some of the extravagances like golf-courses and entertainment areas should forthwith revert back to local governments.

The current property tax rates in many cities are very low and make little distinction between independent houses and apartment units. There is no dearth of opulent and large mansions that occupy large chunks of property without sufficiently internalising their contribution to keeping land values inflated. A property taxation policy which favors high-rises over individual houses, and a steeply rising property tax rate on houses beyond a certain size could align incentives among property owners. Such policies are being actively debated in cities like London. Given that property is immobile, such taxation is less distortionary and could, apart from discouraging newer independent units, incentivise existing owners to redevelop their properties.

All this has to be complemented with policies that facilitate the development of a vibrant mortgage market. This would require addressing the fundamental issue of lack of transparent market valuation of properties, distorted by the differential between the notified registration value and the actual market price. A bouquet of policies to lower stamp and registration duties, dispense with formal notification of registration values, limit circulation of black money in real estate transactions, create a database of property transactions and prices, stricter monitoring of housing finance transactions, and so on, would be necessary to address this problem.

Commitment of public resources is, as always, a critical element of any plan. However, the resources are scarce – just Rs 35000 Cr for all of 12th Plan for slum development and urban housing – and requirements immense. Doubtless much more will be required. Public lands could be leveraged to attract private capital. These resources will have to be judiciously deployed on housing construction, infrastructure, mortgage interest subsidies, and to incentivise private developers, so as to generate the biggest bang for the buck.